Is Rising Income Inequality a Problem?

In the American Prospect today, Dalton Conley argues that income inequality doesn't really matter much. What matters is increased government spending on the poor so they have the same opportunities as everyone else. Bruce Bartlett comments:

At the risk of getting Conley's membership in the liberal club revoked, I think he is right. I have never understood how I am worse off if the top 1% of households increase their share of national wealth or income as long as the absolute level of wealth and income of the other 99% is unchanged. It may be aesthetically displeasing, but it doesn't impose any actual costs on anyone as long as the pie is not fixed. Of course, were that the case it would be different. Gains by the wealthy would necessarily come at the expense of everyone else.

Implicitly, liberals tend to believe the pie is fixed. But, generally speaking, it isn't. A rising tide does tend to lift all boats even if those at the top get lifted a lot more. But Conley is also right to ridicule the view, common among many conservatives, that enriching the wealthy somehow automatically benefits the poor. That's obviously nonsense....For this reason, I have always been more sympathetic to programs that aid the poor than other conservatives.

I agree that inequality per se is probably overemphasized by liberals. But I think that both Conley and Bartlett miss something essential. A strong safety net and a commitment to equal opportunity for everyone is certainly important, and this can be funded to some extent by progressive taxes that end up redistributing income downward. But something else is crucial too: a robust, thriving middle class. Not a middle class that receives an ever increasing stream of government bennies to make up for its stagnant wages, but a middle class that's growing organically, one that sees its own future as brighter than its present and its children's as brighter yet. If you lose that, all the government programs in the world won't make up for it.

Rising inequality, then, is just a symptom of the real problem: sluggish middle class wages in a country that's been growing energetically for decades. That's the core problem. Get median wages growing at the same rate as the country itself and inequality will take care of itself because there will automatically be less money left over for the rich.

I don't pretend to know all the reasons why middle income wages have risen so slowly for the past three decades — globalization probably plays a role, as do declining union density and the rising importance of cognitive labor — but I can certainly point a finger at a symptom: the widespread idea that workers don't really deserve to share in national productivity gains because it's management that's really responsible for them. This is one of those conceits that the rich use to rationalize their enormous income growth, but it's plainly specious. Ask an economist what's responsible for increased productivity, and the most likely answer you'll get is: new technology. So if we really wanted to reward the people who are responsible for productivity growth, we'd shower riches on engineers and scientists. But we don't. We shower riches on the CEOs who buy their products and make use of them.

But buying a new inventory control system is hardly a sign of managerial brilliance. It's just something that every company eventually does once a better one is invented, and the CEO who signs the purchase order to buy it is no more responsible for productivity growth than the workers who use it. They're both piggybacking off of someone else's invention, and there's no special reason why either one should be thought more deserving of sharing in the rewards. They both should.

Long story short, workers in thriving economies should thrive too. When they don't, countries almost inevitably decline, and bread and circuses can never make up for it. I think the key insight here is one that FDR knew well: people want to earn money, not have it given to them, and that's what we should focus on: getting middle class earnings growing again. A whole lot of other problem will take care of themselves if we do.